Direct Indexing for Your Taxable Accounts

Schwab Personalized Indexing™: Why It’s Time to Rethink “Passive” Investing for Your Taxable Accounts

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Why Listen to Me?

I’ve worked with hundreds of high-net-worth investors and financial advisors who are navigating concentrated stock risk, legacy asset transitions, RSUs, charitable giving, and tax planning strategies. What I’ve seen consistently is that many clients outgrow the utility of traditional ETFs and mutual funds long before they realize it. Schwab Personalized Indexing™ (SPI) is the evolution of indexing that meets the needs of today’s complex investors.

I recommend SPI to clients looking for smarter after-tax returns, greater personalization, and a way to align investments with values and real-life financial goals. Here’s why it matters.

Key Takeaways

• SPI offers daily tax-loss harvesting and deeper customization than ETFs or mutual funds.
  
• Ideal for executives with RSUs, tax-sensitive investors, and those seeking values-based investing.
  
• Allows personalized exclusions, charitable giving optimization, and transition from legacy assets.
  
• Competitive pricing and low minimum make it broadly accessible.
  

What Is Schwab Personalized Indexing™?

Schwab Personalized Indexing is a separately managed account (SMA) that allows you to track the performance of an index — like the Schwab 1000 or MSCI EAFE — while owning the individual securities inside it.

This means your portfolio can be:

1. Tax-efficient: SPI monitors your account daily for opportunities to harvest losses.
   
2. Customizable: Exclude stocks, sectors, or entire industries based on personal, financial, or ethical reasons.
   
3. Value-aligned: Reflect your personal beliefs, like ESG preferences or exclusion of a company where you work.
   
4. Flexible: Fund your account with cash or with eligible securities.
   

Who Is SPI a Fit For?

1. The Executive with RSUs or Concentrated Stock Holdings

Let’s say you’re a long-time employee at Microsoft with a large equity position. You want to diversify, but buying a broad-market ETF just increases your exposure to the same stock.

SPI lets you:

Exclude Microsoft and similar holdings

Reduce single-stock risk

Maintain diversified market exposure without overlap

2. The High-Income, Tax-Sensitive Investor

If you’re in a 37%+ tax bracket, every gain gets eaten away quickly. SPI is constantly seeking out loss harvesting opportunities that can be used to offset gains elsewhere in your portfolio.

Losses are harvested in real-time

Portfolios optimized for after-tax outcomes

You keep more of what you earn

3. The Charitable Giver

Gifting appreciated securities is one of the most tax-efficient giving strategies. SPI makes it easy:

Identify highly appreciated holdings

Transfer to a donor-advised fund like Schwab Charitable

Replace donated holdings to keep your portfolio aligned

4. The Values-Driven Investor

Want to avoid fossil fuels? Exclude defense contractors? Favor ESG-friendly companies?

SPI allows:

Exclusions by stock, industry, or sub-sector

ESG strategies like MSCI KLD 400 Social Index

Tracking error managed to stay close to your selected benchmark

5. The Legacy Asset Holder

Inherited a taxable portfolio filled with mutual funds and ETFs? SPI allows you to transition in a tax-aware way.

Transition analysis provided by Schwab

Model gains/losses before investing

Turn your current holdings into a tax-efficient, diversified SPI portfolio

How SPI Compares to ETFs and Mutual Funds (And Why That Matters to You)

Most investors start with ETFs or mutual funds, and for good reason. They’re cost-effective, diversified, and simple. But when your tax picture or portfolio complexity grows, they start to fall short.

With ETFs and mutual funds:

You own a pooled vehicle, not the underlying securities

You can’t customize your holdings

You can’t harvest losses on individual stocks

With Schwab Personalized Indexing:

You own the stocks

Losses can be harvested daily to reduce taxes

You can exclude stocks, sectors, and tailor your exposure

You can fund with existing investments and reduce concentrated risk

This isn’t about choosing a new fund. It’s about choosing a more advanced way to invest.

Real-World Example: Jamie, the Microsoft Executive

Jamie has:

$100,000 of Microsoft stock with embedded capital gains

$100,000 in cash she wants to invest

Option 1: She buys an index fund tracking the Schwab 1000 Index. But Microsoft makes up ~5.7% of that index — her exposure only increases.

Option 2: She uses Schwab Personalized Indexing, tracks the same index, but excludes Microsoft and other tech names.

Result:

She diversifies away from tech

Maintains market exposure

Avoids unnecessary overlap and risk

This is SPI in action.

Pricing and Minimums in 2025

SPI is accessible:

Minimum investment: $100,000

Fees:

0.25% on first $500,000

0.20% on $500,001 - $2M

0.15% on amounts over $2M

And it includes:

Tax loss harvesting

Exclusion customizations

After-tax performance tracking

When tax alpha can exceed ~2% annually, SPI more than pays for itself.

Best Practices for Using Schwab Personalized Indexing™

Want to get the most out of SPI? Here are some things I’ve learned from experience:

Go digital. With 300-600 holdings, e-statements and tax forms make life easier.

Understand trade-offs. Excluding too many stocks can increase tracking error. That’s okay — just know what to expect.

Coordinate with your tax advisor. SPI is powerful, but syncing it with your CPA can maximize the value.

Conclusion: Is SPI Right for You?

If you want more tax efficiency, more control, and a smarter way to invest, Schwab Personalized Indexing is likely the upgrade your portfolio needs.

It puts the investor back in the driver’s seat — and allows your investments to reflect your goals, your values, and your tax realities.

You’re not just buying the market anymore. You’re managing outcomes.

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FAQs

Q: What’s the main advantage of SPI over ETFs?

A: SPI allows daily tax-loss harvesting and full personalization. ETFs can’t offer either.

Q: Can I fund SPI with stocks I already own?

A: Yes. SPI accepts U.S.-traded stocks and certain ETFs or mutual funds. A transition analysis will help determine tax efficiency.

Q: Can SPI be used in an IRA?

A: No. SPI is designed for taxable accounts to take advantage of tax strategies.

Q: Can I use SPI to support my charitable giving?

A: Absolutely. Donate appreciated shares to a Donor-Advised Fund, then replace them within your portfolio — smart, tax-savvy giving.

Q: Will SPI match index performance exactly?

A: Not always. Because of exclusions and tax harvesting, you may see slight tracking error. But after-tax, SPI often outperforms.

A: An Apples-to-Apples Example: SPI vs. a Traditional S&P 500 ETF

Let’s walk through a realistic scenario I often see with clients: someone with a $1 million taxable investment account looking to stay invested in the U.S. equity market — either through a traditional S&P 500 ETF like SPY or VOO, or through Schwab Personalized Indexing (SPI) tracking a comparable index like the Schwab 1000 or Solactive US Large Cap Index.

Now imagine this investor experiences a 20% market decline in Year 1, which we’ve seen happen more than once in recent years. In a traditional ETF, this would result in a $200,000 paper loss. But unless the investor sells the entire position, those losses stay unrealized and can’t be used to offset gains elsewhere. That means no immediate tax benefit.

With SPI, the portfolio is built using the individual securities inside the index, not a single pooled fund. As a result, Schwab’s technology can proactively scan for opportunities to sell specific stocks with losses — a strategy known as tax-loss harvesting — while reinvesting in similar positions to maintain market exposure and avoid triggering wash sale rules.

In a 20% downturn, it’s reasonable to expect SPI to harvest $100,000 to $150,000 in capital losses, depending on how diversified the holdings are and how quickly the market moves. If the investor is in the top federal tax bracket — 37% income plus the 3.8% Net Investment Income Tax — this could result in tax savings of approximately $20,000 to $35,000 over the next few years as those losses are used to offset gains elsewhere or carried forward.

Over the same five-year period, assuming the market rebounds with average growth of about 10% annually, both portfolios might end up at a similar pre-tax value — somewhere around $1.6 million. But one portfolio (the ETF) has done little to manage taxes, while the SPI portfolio has potentially saved the investor tens of thousands of dollars in taxes, just by taking advantage of volatility.

Please note: This is a hypothetical example meant to illustrate key concepts and is not a guarantee of results. Actual performance, tax outcomes, and suitability will vary based on individual circumstances. Investors should consult with a tax advisor before making decisions based on after-tax projections.